Nifty FMCG drops 9.6% in October, records worst monthly drop in 6 years on weak Q2 numbers | Stock Market News

Indian FMCG stocks have emerged as the worst performers in October so far, primarily due to a combination of factors that have negatively impacted investor sentiment.

The disappointing performance in the September quarter has raised concerns among analysts and investors as many leading FMCG companies reported results that fell below expectations, prompting analysts to revise their target multiples downward.

Additionally, cautious commentary from various companies regarding their outlooks has added to the prevailing concerns surrounding the sector. The slowdown in sales in urban India, coupled with a notable surge in commodity prices, has also weighed heavily on the industry.

Consequently, the FMCG index has recorded a notable decline of 9.6% thus far this month, representing the largest monthly decrease in the past six years. At current levels, seven constituents of the index are trading 15% to 22% below their recent 52-week highs, with Tata Consumer Products leading this downturn.

Slowdown in urban spending hits FMCG profits

Major FMCG companies such as HUL and Nestle have reported a disappointing set of numbers for the September quarter (Q2FY25), with results falling below street estimates. The heads of these companies have highlighted the significant impact of declining sales in urban India as a key factor behind their underperformance.

Urban areas are crucial for FMCG companies, as they account for two-thirds of total sales, while rural areas contribute the remaining one-third, as per the market experts.

Analysts note that urban consumers are becoming increasingly cautious with their spending, pressured by rising living costs and rising food inflation, both of which are eroding the purchasing power of the middle class.

For context, food inflation surged to 9.2% in September, up from 5.4% in July—its highest point in 13 months—driven by a sharp rise in vegetable prices along with notable increases in cereal and pulse prices.

Apart from the sluggish urban demand, the rise in commodity prices has also adversely impacted FMCG margins in Q2. The price of palm oil, a key raw material used in everything from food products to soaps, has been rising since March, weighing on consumer goods makers’ margins.

For instance, ITC reported that the cost of raw materials as a percentage of sales climbed to 44.6%, amounting to ₹13,974 crore in the September quarter, up from 40.2%, or ₹11,320 crore, in the same period last year. This surge in raw material costs led to a 330-basis point decline in the company’s operating profit margin.

Urban slowdown vs. Rural recovery

FMCG volumes in rural areas have been picking up pace since the March quarter and have sustained their momentum into the June and September quarters. However, during the same period, urban demand is shrinking, highlighting a growing divide between the two markets.

Analysts have pointed out that while social welfare programs provide some relief to rural Indians, it is the urban households that are left to fend for themselves. Urban Indians are further troubled by a sluggish job market and lower disposable incomes, making it increasingly difficult for them to maintain their standard of living.

HUL management noted that an urban growth slowdown, partly offset by a gradual rural recovery, created a challenging backdrop during the quarter. Inflation in crude palm oil and tea weighed on gross margins.

Tata Consumer said rural demand has gathered pace over the last three quarters, including the July-September period, overtaking urban growth, partly driven by increased government spending.

Nestle India Chairman & Managing Director Suresh Narayanan in his post-earnings commentary said, “The FMCG sector is facing sluggish demand with the growth in F&B declining to 1.5-2% as against double digit some quarters ago. This decline is due to a combination of factors, including food inflation.”

The market is facing a muted demand. It is extremely clear that the growth in the F&B sector, which used to be in double digit a couple of quarters ago, is now down to 1.5 to 2%, he added.

While the slowdown is a concern, it is limited mainly to the lower half of the urban market, particularly popular and mass-market segments. In contrast, premium products are experiencing growth.

A recent report released by market researcher NielsenIQ indicates that premium brands are growing at nearly twice the rate of their non-premium counterparts in the FMCG sector, driven by an expanding base of aspirational consumers.

The K-shaped recovery has been fueled by nearly 70% of consumers at the higher end who are willing to pay a premium for products that offer greater durability and quality, said the report.

Going forward, analysts believe that the recovery in popular and mass-market segments will rely on a moderation in inflation.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.